Funds seek alternatives to rediscover their edge

SUPER and managed funds are looking for alternatives in riskier, non-traditional spheres as they struggle to maintain form.

The sector is digging for investments beyond the top 100 companies and backing small projects by providing venture capital or private equity to fund projects at startup or transition phases.

Addressing the recent Australian Superannuation Industry Forum in Perth, Development Australia Fund chief executive Ian Court said the transition into the private equity industry had been the only real bright light in a sector that had suffered negative returns over the past year.

Mr Court said total capital committed to private equity had grown almost two and half times since 1998, to $6.3 billion.

According to the Australian Venture Capital Association, in the year to June 30 2001, the Australian private equity industry raised more than $1.9 billion and invested in 245 companies – 100 more than were supported in the previous year.

To put this in perspective, however, the industry still represents less than 1 per cent of the market capitalisation of the Australian Stock Exchange as at June 30 2002.

And trustees today are still unlikely to allocate more than 5 per cent of their funds to private equity.

But while the growth of the sector has been strong, the private equity industry is by no means a new phenomenon. Private equity was encouraged by the Federal government back in the mid 1980s.

The entrepreneurial excesses of the late 1980s cast a pall over the industry, which failed to fully recover until the recent information technology boom.

With many of the firms having gone under, new entrepreneurial firms are emerging with bricks and mortar concepts, driven by research from government departments, including the Commonwealth Scientific and Industrial research Organisation (CSIRO) and Australia’s universities.

For investors there are now almost 20 Australian options available of private equity funds, run by Rothschild, St George, Deutsche, Macquarie, Hastings, and AMP to name a few. Each varies according to its level of commitment for carrying risk.

“What we have seen over the last 12 months is investors that are willing to take larger and larger commitments,” Mr Court said.

He said the market would continue to increase given the support of the Howard Government toward venture capitalism and the current state of the equity market. However, the expertise among funds to seek out potential investment targets is still very thin on the ground.

“The skill set involved in doing due diligence is quiet different,” Mr Court said.

In the public equity markets, company information was freely available, company valuations

were instantaneous, and there was

a liquid mechanism to trade in

and out of a company, he said.

Private markets on the other hand were said to be less efficient. Company information was not widely available and valuations took place only periodically.

“It requires more active management than most asset classes, involving a blend of business and financial skills,” Mr Court said.

“The valuation of assets is certainly an issue. What can you set the valuations on?”

In WA, the $480 million WA Local Government Superannution Plan has also been dabbling in the private equity market. Last week it invested in two firms that have developed products researched from the University of WA.

LGSP chairman Alex Bajada said the fund was always looking for good opportunities but would only support ventures once they had a product that was marketable.

“We don’t fund research and development,” he said.

Vitrostone and APT have each been given $2 million through convertible notes to market their products. Vitrostone produces light paving stones and tiles, while APT has developed a highly effective sun cream using naco-technology to break down zinc oxide.

The superannuation fund has less than 4 per cent of its total funds invested in private equity, an amount that continues to grow.

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